Why the Treasury's financing plans are sparking anxiety on Wall Street

By Joy Wiltermuth

Yields on 10-year and 30-year bonds were rising again Monday after falling sharply last week

Investors are focused on what the Treasury, led by Scott Bessent, might do to bring down borrowing costs.

Money now costs more to borrow, and that's begun to lure investors back to the $32 trillion Treasury market for yield, following weeks of heavy selling.

Treasury yields hit 24-year highs in early October, with the yield on the benchmark 10-year note BX:TMUBMUSD10Y reaching 5.31% before bond buyers stepped back in to bring yields back down to 5.14% as of Monday. Bond yields and prices move in opposite directions.

Last week, the 10-year yield even briefly traded as low as 5.04% on jitters about the artificial-intelligence trade. Importantly, there also were hopes that Treasury Secretary Scott Bessent might signal he's considering cutting the size of auctions for 20- and 30-year Treasurys.

Demand for long-dated Treasurys BX:TMUBMUSD30Y has been particularly spotty, with yields prone to flying higher, despite increased Treasury buybacks. That has pushed up borrowing costs for the government, households and families.

"We do think cuts are the way to go," Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, said in an interview Monday. However, now there's growing concern that any reduction to long-dated supply might not arrive for a quarter or two, he said.

Expectations were running high that the Treasury might use a primary dealer questionnaire on Friday to hint at tweaks to long-dated supply, potentially as soon as its Nov. 4 quarterly refunding statement. That will cover Treasury issuance plans from November to the end of 2027.

Yet the questionnaire left enough room for interpretation, triggering disappointment. U.S. yields were pushing higher along with global yields on Monday.

"The pressure is on," said Ed Al-Hussainy, portfolio manager at Columbia Threadneedle Investments. "I think the Treasury is cooking up something for the November refunding, whether it's something with respect to auction sizes or, more likely, some kind of guidance for these auction sizes next year."

Others have debated whether the Treasury might consider scrapping 20-year auctions altogether, a move that seems unlikely. Citigroup rate strategists led by Jason Williams said they expect the November refunding announcement to reduce 20-year and 30-year auctions by $3 billion each, which would mean new issuance auctions top out at sizes of $13 billion and $22 billion, respectively.

The Citi team, in a Friday client note, pointed to the "pronounced selloff in long-end yields since the last refunding announcement" and the "relatively weak performance" of the Treasury's first few increased "long-end buyback operations" as motivation for the Treasury to shift more issuance into short-term Treasury bills. The Treasury didn't respond to a request for comment.

U.S. financing needs

The U.S. national debt hit $40 trillion this summer, while the federal budget deficit has reached nearly $2 trillion. That means the Treasury has a large financing need.

It currently costs taxpayers less if the Treasury sells 1-year T-bills BX:TMUBMUSD01Y at roughly 4.2% yields, versus close to 5.5% on 20-year and 30-year Treasurys.

Yet the persistent U.S. funding need isn't the only factor investors in the bond market face. Signs of stress in credit markets have begun to emerge, especially among neocloud companies fighting to keep pace in the AI race. Inflation readings for September also came in hotter than expected.

"I am hesitant to believe that supply is the only challenge," said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott, pointing to AI and inflation pressures, as well as uncertainty around how the Fed plans to tame growth in the cost of living that's stuck well above 2%.

Brij Khurana, a fixed-income portfolio manager at Wellington Management, said he's less focused on Treasury yields right now than on recent fallout from higher yields on leveraged players in the AI boom - and what that could mean for growth and the economy.

"It's a very tricky environment," Khurana said. "The market has moved on from rates to focus on credit."

The chances of a rate hike at the Fed's meeting next week were less than 20% on Monday, down from nearly 60% a month ago, according to the CME FedWatch Tool. The next likely date for a hike looks to be in December.

Bigger picture, many of the world's developed economies already have been moving away from issuing long-dated debt, while the U.S. "sweet spot" is viewed as being in the 3-year to 7-year range, said Al-Hussainy at Columbia Threadneedle.

Yet he sees buying in 30-year Treasurys as essentially a bet on a "skinny" fiscal response when the next recession hits, given concerns about inflation and the deficit that emerged out of the pandemic response. However, a smaller fiscal action could prompt the Fed to do more, including slashing interest rates and potentially restarting its purchases of longer-dated U.S. debt, he said.

"That's what that bond is for," Al-Hussainy said. "When the Fed does more, it's going to benefit you."

-Joy Wiltermuth

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10-19-26 1545ET